nmrx10q033109.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
 
 
 
     
þ
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended March 31, 2009
or
o
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from          to          
 
Commission file number: 0-22920
 
 

 
Numerex Corp.
(Exact Name of Registrant as Specified in Its Charter)
 
     
Pennsylvania
  
11-2948749
(State or Other Jurisdiction
of Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
 
1600 Parkwood Circle, Suite 500
Atlanta, GA  30339-2119
(Address of Principal Executive Offices) (Zip Code)
 
(770) 693-5950
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 
          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes o    No  o
 

  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

             
Large accelerated filer o
  
Accelerated filer þ
  
Non-accelerated filer o
  
Smaller reporting company o


    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 

As of May 4, 2009, an aggregate of 14,174,228 shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding.
 
 
 

NUMEREX CORP. AND SUBSIDIARIES

INDEX

   
Page
  
PART I - FINANCIAL INFORMATION
      
Item 1.  Financial Statements
      
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three Months Ended March 31, 2009 and March 31, 2008.
     3  
Condensed Consolidated Balance Sheets (Unaudited) March 31, 2009 and December 31, 2008
     4  
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2009 and March 31, 2008.
     5  
Condensed Statement of Shareholders' Equity (Unaudited) for the Three Months Ended March 31, 2009
     6  
Notes to Condensed Consolidated Financial Statements - Unaudited
     7  
         
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
     16  
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
     21  
Item 4.  Controls and Procedures
     21  
 PART II - OTHER INFORMATION
        
Item 1.  Legal Proceedings
     21  
Item 1A.  Risk Factors
     22  
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
     22  
Item 3.  Defaults Upon Senior Securities
     22  
Item 4.  Submission of Matters to a Vote of Security Holders
     22  
Item 5.  Other Information
     22  
Item 6.  Exhibits
     22  
Signature Page
     23  
Certifications
     24  
Exhibits
     25  


 

 
 

PART I.  FINANCIAL INFORMATION

Item 1.
  Financial Statements.


Numerex Corp.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
(Unaudited)
   
Three Months Ended
   
March 31,
     
2009
2008
 Net sales:
        
   Hardware
   $
5,675
 $           13,624
   Service
    
            6,987
            6,832
 Total net sales
    
           12,662
           20,456
 Cost of hardware sales, exclusive of depreciation and amortization
    
            4,928
            12,162
 Cost of services, exclusive of depreciation and amortization
    
              2,434
              1,906
 Gross Profit
    
           5,300
           6,388
 Selling, general, and administrative expenses
    
            5,184
4,948
 Research and development expenses
    
              508
              530
 Bad debt expense
    
                 155
                 138
 Depreciation and amortization
    
              792
              751
 Operating earnings (loss)
    
(1,339)
                21
  Interest expense, net
    
     (347)
               (403)
Other expense
    
-
                  (2)
 Loss before income tax
    
(1,686)
               (384)
 Income tax (expense) benefit
    
(37)
                (166)
 Net loss
    
(1,723)
              (218)
Other comprehensive income (loss), net of income tax:
        
Foreign currency translation adjustment
    
(2)
10
Comprehensive loss
   $
(1,725)
 $              (208)
         
 Basic loss per common share
   $
(0.12)
 $             (0.02)
 Diluted loss per common share
   $
(0.12)
 $             (0.02)
Weighted average common shares outstanding:
        
   Basic
    
            14,169
            13,725
   Diluted
    
            14,169
            13,725


See accompanying notes to condensed consolidated financial statements – unaudited

 
3
 

 
 
CONDENSED CONSOLIDATED BALANCE SHEET
  
(In thousands)
  
   
March 31,
    
December 31,
  
   
2009
    
2008
  
   
(unaudited)
        
ASSETS
            
CURRENT ASSETS
            
  Cash and cash equivalents
   $ 9,463     $ 8,917  
 Accounts receivable, less allowance for doubtful accounts of $1,067 at                                                                                                               March 31, 2009 and $1,010 at December 31, 2008
     7,839       9,159  
  Inventory, net
     6,305       8,506  
  Prepaid expenses and other current assets
     1,814       1,508  
TOTAL CURRENT ASSETS
     25,421       28,090  
                 
  Property and equipment, net
     2,055       1,765  
  Goodwill, net
     23,787       23,771  
  Other intangibles, net
     5,517       5,796  
  Software, net
     2,873       2,796  
  Other assets
     239       288  
TOTAL ASSETS
   $ 59,892     $ 62,506  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
CURRENT LIABILITIES
                
  Accounts payable
   $ 6,060     $ 7,289  
  Other current liabilities
     2,877       2,943  
  Note payable, current
     2,568       2,568  
  Deferred revenues
     1,907       1,134  
  Obligations under capital leases, current
     23       29  
TOTAL CURRENT LIABILITIES
     13,435       13,963  
                 
LONG TERM LIABILITIES
                
  Obligations under capital leases and other long-term liabilities
     488       520  
  Note payable
     6,987       7,629  
TOTAL LONG TERM LIABILITIES
     7,475       8,149  
                 
COMMITMENTS AND CONTINGENCIES
     -       -  
                 
SHAREHOLDERS’ EQUITY
                
  Preferred stock - no par value; authorized 3,000,000; none issued
     -       -  
  Class A common stock - no par value, authorized 30,000,000, issued 15,354,525
                
    shares at March 31, 2009 and 15,349,327 shares at December 31, 2008
     50,820       50,801  
  Class B common stock – no par value; authorized 5,000,000; none issued
     -       -  
  Additional paid-in-capital
     4,881       4,587  
  Treasury stock, at cost, 1,185,809 shares on March 31, 2009 and
                
    December 31, 2008
     (5,053 )     (5,053 )
  Accumulated other comprehensive loss
     (10 )     (8 )
  Retained deficit
     (11,656 )     (9,933 )
TOTAL SHAREHOLDERS' EQUITY
     38,982       40,394  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 59,892     $ 62,506  

See accompanying notes to condensed consolidated financial statements – unaudited

 
4
 



 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  
Unaudited
  
(In thousands)
  
   
Three Months Ended
  
   
March 31,
  
   
2009
    
2008
  
Operating activities:-
            
    Net loss
   $ (1,723 )   $ (218 )
  Adjustments to reconcile net loss to net cash
                
    provided by operating activities:
                
     Depreciation
     225       193  
     Amortization
     567       558  
     Bad debt expense
     155       138  
     Obsolete inventory expense
     20       (82 )
     Non-cash interest expense
     121       121  
     Stock option compensation expense
     294       293  
     Stock issued in lieu of directors fees
     19       15  
     Deferred income taxes
     -       (166 )
  Changes in assets and liabilities which provided cash:
                
     Accounts and notes receivable
     1,153       (907 )
     Inventory
     2,180       (265 )
     Prepaid expenses and other current assets
     (294 )     (700 )
     Other assets
     -       12  
     Accounts payable
     (1,229 )     1,464  
     Other current liabilities
     (72 )     (170 )
     Deferred revenues
     773       2,062  
     Income taxes
     (20 )     (59 )
        Net cash provided by operating activities
     2,169       2,289  
Investing activities:
                
   Purchase of property and equipment
     (515 )     (197 )
   Purchase of intangible and other assets
     (380 )     (299 )
   Purchase of Orbit One Communications, Inc. assets
     -       (1,756 )
       Net cash used in investing activities
     (895 )     (2,252 )
Financing activities:
                
   Proceeds from exercise of common stock options
     -       53  
   Principal payments on capital lease obligations
     (12 )     (23 )
   Principal payments on notes payable and debt
     (714 )     (714 )
       Net cash used in financing activities
     (726 )     (684 )
Effect of exchange rate differences on cash
     (2 )     10  
       Net increase (decrease) in cash and cash equivalents
     546       (637 )
 Cash and cash equivalents at beginning of period
     8,917       7,425  
Cash and cash equivalents at end of period
   $ 9,463     $ 6,788  
Supplemental Disclosures of Cash Flow Information
                
Cash payments for:
                
   Interest
     226       309  
   Income taxes
     12       59  
Disclosure of non-cash activities:
                
   Non-cash interest
     121       121  
   Common stock issued for the purchase of assets of Airdesk, Inc.
     -       1,706  

See accompanying notes to condensed consolidated financial statements – unaudited

 
5
 


 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
  
(In Thousands)
  
                                           
                           
Accumulated
              
               
Additional
          
Other
              
   
Common
    
Stock
    
Paid-In
    
Treasury
    
Comprehensive
    
Retained
        
   
Shares
    
Amount
    
Capital
    
Stock
    
Loss
    
Deficit
    
Total
  
Balance, December 31, 2008
     15,350     $ 50,801     $ 4,587     $ (5,053 )   $ (8 )   $ (9,933 )   $ 40,394  
Issuance of shares under Directors Stock Plan
     5       19       -       -       -       -       19  
Share-based compensation
     -       -       294       -       -       -       294  
Translation adjustment
     -       -       -       -       (2 )     -       (2 )
Net loss
     -       -       -       -       -       (1,723 )     (1,723 )
                                                         
Balance, March 31, 2009
     15,355     $ 50,820     $ 4,881     $ (5,053 )   $ (10 )   $ (11,656 )   $ 38,982  

See accompanying notes to condensed consolidated financial statements – unaudited

 
6
 

NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(UNAUDITED)


NOTE A – BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2009 may not be indicative of the results that may be expected for the year ending December 31, 2009.  For further information, reference is also made to Numerex Corp.’s (the “Company’s”) Annual Report on Form 10-K for the year ended December 31, 2008 and the consolidated financial statements contained therein.

Numerex Corp. (NASDAQ: NMRX) is the machine-to-machine (M2M) provider to some of the world’s largest organizations delivering secure, all-around solutions through a single source. The Company’s M2M expertise enables its customers to efficiently, reliably, and securely monitor and manage assets remotely whenever and wherever needed, while simplifying and speeding up development and deployment. Numerex is the first M2M service provider in North America to carry the ISO 27001 information security certification. Numerex DNA™ offerings include hardware Devices, Network services, and software Applications offered as individual components or as bundled services.

The consolidated financial statements include the results of operations and financial position of Numerex and its wholly owned subsidiaries.  Intercompany accounts and transactions have been eliminated in consolidation.

NOTE B – SHARE-BASED COMPENSATION                                                                                                
 
Share-based compensation expense recognized under Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) for the three months ended March 31, 2009 and 2008 was $294,000 and $293,000, respectively.  Total unrecognized compensation related to unvested stock-based awards granted to employees and members of our board of directors at March 31, 2009, net of estimated forfeitures, is $1.5 million and is expected to be recognized over a weighted-average period of 1.2 years.

 
7
 

 
A summary of the Company's stock option activity and related information for the three months ended March 31, 2009 follows:

         
Weighted
    
Weighted
    
Weighted Avg.
    
Aggregate
  
         
Average
    
Average Remaining
    
Grant Date
    
Intrinsic
  
   
Shares
    
Ex. Price
    
Contractual Life (Yrs)
    
Fair Value
    
Value
  
Outstanding, at 12/31/08
     2,005,721     $ 5.97       -     $ 3.83     $ 383,626  
Options granted
     -     $ -       -     $ -     $ -  
Options exercised
     -     $ -       -     $ -     $ -  
Options cancelled
     (19,250 )   $ 7.20       -     $ 4.15     $ -  
Options expired
     (1,000 )   $ 6.21       -     $ 2.73     $ -  
Outstanding, at 03/31/09
     1,985,471     $ 5.96       5.32     $ 3.82     $ 347,956  
Exercisable, at 03/31/09
     1,491,281     $ 5.62       4.32     $ 3.71     $ 342,706  


The following table summarizes information related to stock options outstanding at March 31, 2009:



           
Options outstanding
          
Options exercisable
        
Range of exercise prices
    
Number Outstanding at March 31,  2009
    
Weighted Average Remaining Contractual Life (Years)
    
Weighted Average Exercise Price
    
Number Exercisable at March 31, 2009
    
Weighted Average Exercise Price
  
$ 1.00 –  4.00       558,665       4.38     $ 3.03       483,665     $ 2.95  
  4.01 –  8.00       915,432       5.75     $ 5.82       636,491     $ 5.44  
  8.01 –  12.94       511,374       5.57     $ 9.40       371,125     $ 9.40  
          1,985,471       5.32     $ 5.96       1,491,281     $ 5.62  
                                             





 NOTE C - INVENTORY

The components of inventory, net of reserves, consist of the following:

   
March 31,
    
December 31,
  
(In thousands)
  
2009
    
2008
  
Raw materials
   $ 1,568     $ 2,710  
Work-in-progress
     26       14  
Finished goods
     5,092       6,388  
Less reserve for obsolescence
     (381 )     (606 )
Inventory, net
   $ 6,305     $ 8,506  



 
8
 

NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS

We account for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, goodwill and certain intangible assets with indefinite lives are not amortized but are subject to an annual impairment test, and more frequently, if events or circumstances occur that would indicate a potential decline in our fair value.  The following table presents the changes in goodwill during fiscal 2009 and 2008 (in thousands):
 

   
For the Three Months ended March 31, 2009
    
For the Year ended December 31, 2008
  
Wireless M2M Data Communications
            
Balance at the beginning of the period
            
Goodwill
   $ 25,905     $ 20,728  
Accumulated impairment losses
     (3,060 )     -  
      22,845       20,728  
                 
Acquisition of Ublip, Inc.
     16       1,640  
Acquisition of assets of Airdesk, Inc.
     -       1,706  
Acquisition of assets of Orbit One, Inc.
     -       1,831  
Impairment of goodwill of Orbit One, Inc.
     -       (3,060 )
Balance at the end of the period
                
Goodwill
     25,921       25,905  
Accumulated impairment losses
     (3,060 )     (3,060 )
      22,861       22,845  
                 
Digital Multimedia and Networking
                
Balance at the beginning of the period
                
Goodwill
     4,015       4,015  
Accumulated impairment losses
     (3,089 )     (2,140 )
      926       1,875  
                 
Impairment of goodwill
     -       (949 )
Balance at the end of the period
                
Goodwill
     4,015       4,015  
Accumulated impairment losses
     (3,089 )     (3,089 )
      926       926  
                 
Total at end of period
   $ 23,787     $ 23,771  
 

     The Company did not incur costs to renew or extend the term of acquired intangible assets during the period ending March 31, 2009.  Intangible assets, which will continue to be amortized, consisted of the following (in thousands):

   
March 31, 2009
    
December 31, 2008
  
   
Gross Carrying Amount
    
Accumulated Amortization
    
Net Book Value
    
Gross Carrying Amount
    
Accumulated Amortization
    
Net Book Value
  
Purchased and developed software
   $ 7,640     $ (4,767 )   $ 2,873     $ 7,272     $ (4,476 )   $ 2,796  
Patents, trade and service marks
     13,138       (8,203 )     4,935       13,116       (8,124 )     4,992  
Intangible and other assets
     1,248       (666 )     582       1,278       (474 )     804  
Total Intangible and other assets
   $ 22,026     $ (13,636 )   $ 8,390     $ 21,666     $ (13,074 )   $ 8,592  

Amortization expense of intangible assets totaled $567,000 and $558,000 for the quarters ended March 31, 2009 and March 31, 2008, respectively.
 

As of March 31, 2009, the estimated remaining amortization expense associated with the Company’s intangible assets for the remainder of 2009 and in each of the next four fiscal years is as follows (in thousands):

Remainder of 2009
 $2.1 million
2010
 1.6 million
2011
 1.1 million
2012
 0.8 million
2013
 0.8 million
Thereafter
 2.0 million

 
9
 

NOTE E – NOTES PAYABLE


On December 29, 2006, the Company completed a private placement to Laurus Master Fund, Ltd. (“Laurus”) of (i) a convertible term note in the principal amount of $10,000,000 (“Note C”), and (ii) a warrant to purchase up to 158,562 shares of our common stock.  Interest accrues on this note at a rate of 9.50% annually. This note has a four year term and is secured by substantially all of our assets.  Note C principal reductions began in July 2007 and will continue for the next 42 months with final payment due in December 2010. Interest and principal under convertible Note C may be paid in either cash or, subject to certain conditions, in shares of our common stock.  The Company may only use common stock to make payments on convertible Note C if the price per share of the common stock for the required number of trading days immediately prior to conversion is greater than $11.41.  The holder of the convertible note may convert the entire principal amount of the convertible note, and any accrued interest thereon, into our common stock at a fixed conversion price equal to $10.37 per share.  The fair value of the warrant associated with Note C on December 29, 2006 was $735,000 and was calculated using the Black-Scholes fair value pricing model.
  
On May 30, 2006, the Company completed a private placement to Laurus Master Fund, Ltd. (“Laurus”) of (i) a convertible term note in the principal amount of $5,000,000 (“Note A”) (ii) a non-convertible term note in the principal amount of $5,000,000 (“Note B”), and (iii) a warrant  to purchase up to 241,379 shares of our common stock.  Interest accrues on each of the notes at a rate of 9.75% annually.  Both notes have four year terms and are secured by substantially all of our assets.  The fair value of the warrant associated with Note A and Note B on May 30, 2006 was $846,000 and was calculated using the Black-Scholes fair value pricing model.  
 
The Company may only use common stock to make payments on convertible Note A if the price per share of the common stock for the required number of trading days immediately prior to conversion is greater than $8.70.  The holder of the convertible note may convert the entire principal amount of the convertible note, and any accrued interest thereon, into the Company’s common stock at a fixed conversion price equal to $7.91 per share.

In consideration of the above private placements and other private placements for term notes, the Company issued to Laurus warrants to purchase our common stock, the terms of which are summarized as follows:

     
Common
    
Number
    
Stock
    
of
    
Exercise
  
Expiration
Securities
    
Price
  
Date
  150,000     $ 4.75  
January 13, 2011
  100,000     $ 5.17  
January 13, 2011
  50,000     $ 5.99  
January 13, 2011
  50,000     $ 5.51  
January 28, 2012
  50,000     $ 5.72  
January 28, 2012
  241,379     $ 7.73  
May 30, 2013
  158,562     $ 10.13  
December 29, 2013





 
10
 

NOTE F– INCOME TAXES


The Company accounts for income taxes in accordance with SFAS 109, "Accounting for Income Taxes" which requires the use of the liability method of accounting for deferred income taxes. Effective January 1, 2007, the Company implemented FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)" ("FIN 48"). FIN 48 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

As of March 31, 2009 the Company had $474,000 of unrecognized tax benefits inclusive of interest and penalties of $153,000, all of which would impact the Company's effective tax rate if recognized. The Company anticipates recording $31,000 of  unrecognized tax benefits consisting entirely of interest and penalties on state and local income taxes of $28,000 and $3,000 respectively for the year ended December 31, 2009. This increase in liability would impact the company's effective tax rate if recognized. The Company recognized previously unrecognized tax benefits of approximately $16,000 in the first quarter ending March 31, 2009, as a result of settlements with state taxing authorities. The Company anticipates recording a decrease in liability for unrecognized tax benefits due to expiration of the statute of limitations under certain state administrative practices for the year ending December 31, 2009 in the approximate amount of $19,000 inclusive of interest and penalties of $6,000, and $3,000 respectively. All of the impact from this decrease in liability will impact the Company's effective tax rate.

The Company recorded a tax provision of $37,000 for the three month's ended March 31, 2009 as compared to a tax benefit of $166,000 for the three months ended March 31, 2008 representing effective tax rates of   (2.17)% and 43.2 %, respectively. The difference between the Company's effective tax rate and the 34% federal statutory rate in the current year is due primarily to the Company's valuation allowance against all net deferred tax assets, the amortization of goodwill for tax purposes, and state tax accruals related to unrecognized tax benefits. Differences in the Company's effective tax rate and the 34% statutory rate in the prior year resulted primarily from state tax accruals and incentive stock option expenses.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2005 through 2007 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from years in which net operating losses have arisen are still open for examination by the tax authorities.


NOTE G – LOSS PER SHARE

Basic net loss per common share available to common shareholders is based on the weighted-average number of common shares outstanding excluding the dilutive impact of common stock equivalents.  For periods in which we have net earnings, we base diluted net earnings per share on the weighted-average number of common shares outstanding and dilutive potential common shares, such as dilutive employee stock options.
 
The numerator in calculating both basic and diluted earnings per common share for each period is the same as net loss. The denominator is based on the number of common shares as shown in the following table:

   
Three Months Ended
   
March 31,
(In thousands, except per share data)
    
2009
2008
Common Shares:
        
Weighted average common shares outstanding
    
     14,169
     13,725
Dilutive effect of common stock equivalents
    
             -
             -
Total
    
     14,169
     13,725
         
Net loss
   $
     (1,723)
 $     (218)
         
Net loss per common share:
        
Basic
   $
(0.12)
 $    (0.02)
Diluted
   $
(0.12)
 $    (0.02)


For the three months ended March 31, 2009, the effect of our  1,985,472 stock options and warrants was not included in the computation of diluted earnings per share as their effect was anti-dilutive. For the three months ended March 31, 2007, we excluded antidilutive options of 201,000 shares of common stock and common stock equivalents from the computation of diluted earnings per share.  We excluded these share amounts because the exercise prices of those shares were greater than the average market price of the common stock during the applicable period. 

 
11
 


With the acquisition of Orbit One Communications, the Company could issue an additional 1,250,596 shares of the Company’s common stock.  These shares are currently held in Escrow and are not included in the basic and diluted share calculation.

 NOTE H – LIQUIDITY

The Company believes that existing cash and cash equivalents together with cash generated from operations will be sufficient to meet operating requirements over at least the next twelve months.  This belief could be affected by future operating earnings that are lower than expectations; a material adverse change in the Company’s operating business or a default under the Company’s notes.

NOTE I – ACQUISITIONS

Ublip, Inc. Acquisition

On October 9, 2008 the Company completed the acquisition of Ublip, Inc. (“Ublip”).  The results of Ublip’s operations were included in the consolidated financial statements from October 9, 2008.   Ublip was merged into a wholly-owned subsidiary of Numerex and will be fully integrated into the Company’s operations.   The increase of goodwill of $16,000 was due to additional direct expenses incurred relating to the Ublip acquisition.  

Orbit One Communications, Inc. Acquisition

On August 1, 2007, with an effective date of July 31, 2007 the Company completed the acquisition of the assets of Orbit One Communications, Inc. through its wholly owned subsidiary, Orbit One Communications LLC (“Orbit One”).  The results of Orbit One’s operations have been included in the consolidated financial statements from August 1, 2007.  The assets relate to Orbit One’s satellite-based M2M solutions it provides to government agencies and emergency services markets primarily in the United States.  These solutions include hardware, software, data management, installation, maintenance, and use of its proprietary operational support platform.  

The assets acquired consist of software (including Orbit One’s proprietary mapping and operational support platform), inventory, equipment (primarily communications related computer hardware) accounts receivable, trademarks and other intellectual property.

Initial consideration for the asset purchase was approximately $5.5 million paid in cash plus $384,000 of transaction costs. An additional $732,000 was paid 60 days after closing based on satisfying a net working capital test. In addition, if certain revenue and EBITDA performance objectives and milestones are achieved, subsequent payments could include shares of Numerex Corp’s common stock.  If all earn-out objectives are achieved stock payments could be up to 1,100,000 shares of the Company’s Class A common stock.   If the performance targets are exceeded, Orbit One may receive up to an additional 471,729 shares of the Company’s Class A common stock and an additional cash payment of $2.5 million. Accordingly, approximately 1.6 million shares were issued to an escrow agent for the benefit of Orbit One Communications, Inc. or Numerex as their interests may appear. The earn-out milestones are measured over three periods: (i) from the closing date of the transaction through December 31, 2007; (ii) calendar year 2008; and (iii) calendar year 2009. The Company and Orbit One entered into an escrow agreement, whereby 10% of the cash payments not subject to performance-related milestones were placed in escrow for one year from the closing date in order to settle any indemnification claims under the Agreement and subject to the limitations described therein.  Any additional payments of either cash or equity will be reflected as incremental goodwill.

On December 31, 2007 certain revenue and EBITA targets were met for the first measurement period, ending December 31, 2007.   As a result, 320,833 shares of the Company’s Class A common stock were deemed issued to Orbit One Communications, Inc. for purposes of computing common stock dilution. These shares were valued using the average share price on the measurement date for meeting the contingencies on December 31, 2007 of $8.33 per share, thus increasing goodwill by $2.7 million and our common stock by the same amount. An additional $1.8 million in cash was paid in January 2008 after certain customer agreements were extended.  These shares, however, remain in escrow and the January 2008 payment of $1.8 million is being disputed as part of the legal action. The earn-out milestones for calendar year 2008 were not met.

Airdesk, Inc. Acquisition

On January 5, 2006 the Company completed the acquisition of the assets of Airdesk, Inc. through its wholly owned subsidiary, Airdesk LLC (“Airdesk”).  On January 1, 2008, the asset purchase agreement was amended to remove performance targets on 200,000 un-issued shares with 60,000 shares to be issued on April 1, 2008, 60,000 shares to be issued on April 1, 2009 and the balance of 80,000 shares to be issued on April 1, 2010.   Since these shares were only time contingent, we recognized the value of these shares on the date of the amendment of January 1, 2008.  This resulted in a $1.7 million increase in goodwill and a corresponding increase in common stock.  The average selling price of our common stock on the date of the amendment was $8.53 per share.


12
NOTE J - RECENT ACCOUNTING PROUNCEMENTS

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP 141(R)-1”), which amends and clarifies SFAS No. 141(R), to amend the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP 141(R)-1 did not impact the Company’s consolidated financial statements, but may have an impact in the future to the extent the Company enters into a business combination.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments.  It requires the fair value for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments ("SFAS No. 107"), to be disclosed in the interim periods as well as in annual financial statements.  This standard is effective for the quarter ending after June 15, 2009.  We are currently assessing the potential impact that adoption of this standard may have on our financial statements.
 
In April 2009, the FASB issued FSP FAS 157-4, Determing Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. It clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. This standard is effective for the quarter ending after June 15, 2009. We are currently assessing the potential impact that adoption of this standard may have on our financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which are intended to bring greater consistency to the timing of impairment recognition and provide greater clarity about the credit and noncredit components of debt securities whose fair value is below amortized cost and that are not expected to be sold, and also require increased disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. These standards are effective for the quarter ending after June 15, 2009. We are currently assessing the potential impact that adoption of this standard may have on our financial statements.
      
Effective January 1, 2009, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock, or EITF 07-5. EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of this pronouncement requires the Company to perform additional analyses on both its freestanding equity derivatives and embedded equity derivative features. The adoption of EITF 07-05 did not have any impact on the Company’s consolidated financial statements.
 
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”  This FSP provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.  The FSP was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years.  All prior period earnings per share data presented shall be adjusted retrospectively.  Early application of this FSP was prohibited.  We adopted the FSP in the first quarter of fiscal 2009.  The FSP did not have a material impact on our results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007, including interim periods within that fiscal year. The Company has not elected the fair value option for any of its existing financial instruments as of March 31, 2009, and the Company has not determined whether or not it will elect this option for financial instruments it may acquire in the future.
 
            In May 2008, the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“the FSP”).  The FSP requires that the proceeds from the issuance of certain convertible debt instruments be allocated between a liability component (issued at a discount) and an equity component.  The resulting debt discount must be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense.  The FSP was effective for fiscal years beginning after December 15, 2008, did not permit early application, and required retrospective application to all periods presented. 
We adopted the FSP in the first quarter of fiscal 2009.  The FSP did not have a material impact on our results of operations and financial condition.
 
In April 2008, the FASB issued Statement No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FAS 142-3”). FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB No. 142, “Goodwill and Other Intangible Assets”. The intent is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB No. 141(R), “Business Combinations—revised” (“FAS 141(R)”), and other GAAP. FAS 142-3 was effective for intangible assets acquired beginning January 1, 2009. Accordingly, the impact on the Company would be limited to the extent of any future acquisitions.  As of March 31, 2009, this statement did not have a material impact on our results of operations and financial condition.

13
In December 2007, the FASB issued SFAS No.160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS No. 160”), an amendment of Accounting Research Bulletin No. 51. SFAS No.160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest, and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS No. 160 was effective for fiscal years beginning after December 15, 2008.  We adopted SFAS No. 160 in the first quarter of fiscal 2009. This statement did not have a material impact on our results of operations and financial condition.
 
In December 2007, the FASB issued Statement No. 141(R), "Business Combinations," (“SFAS 141(R)”), which will change the accounting for and reporting of business combination transactions. The most significant changes in the accounting for business combinations under SFAS 141(R) include: (1) valuation of any acquirer shares issued as purchase consideration will be measured at fair value as of the acquisition date; (2) contingent purchase consideration, if any, will generally be measured and recorded at the acquisition date, at fair value, with any subsequent change in fair value reflected in earnings rather than through an adjustment to the purchase price allocation; (3) acquired in-process research and development costs, which have historically been expensed immediately upon acquisition, will now be capitalized at their acquisition date fair values, measured for impairment over the remaining development period and, upon completion of a successful development project, amortized to expense over the asset's estimated useful life; (4) acquisition related costs will be expensed as incurred rather than capitalized as part of the purchase price allocation; and (5) acquisition related restructuring cost accruals will be reflected within the acquisition accounting only if certain specific criteria are met as of the acquisition date; the prior accounting convention, which permitted an acquirer to record restructuring accruals within the purchase price allocation as long as certain, broad criteria had been met, generally around formulating, finalizing and communicating certain exit activities, will no longer be permitted. SFAS 141(R) was effective for all business combinations consummated beginning January 1, 2009. Earlier adoption was not permitted.  We adopted SFAS No. 141(R) in the first quarter of fiscal 2009.  The impact of adopting SFAS 141R will be dependent on the business combinations that the Company may pursue after its adoption.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. For financial assets and liabilities, this statement was effective for fiscal periods beginning after November 15, 2007 and did not require any new fair value measurements. In February 2008, the FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“SFAS 157-2”), was issued which delayed the effective date of FASB Statement No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
 
The Company adopted SFAS 157, as related to financial assets and liabilities in the first quarter of 2008. As a result, the Company was not required to recognize any new assets or liabilities at fair value. We adopted SFAS 157-2 in the first quarter of 2009.  This statement did not have a material impact on our results of operations and financial condition.
 
14
NOTE K – SEGMENT INFORMATION

Segment Information

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements.  The Company has two reportable operating segments.  These segments are Wireless M2M Data Communications and Digital Multimedia, Networking and Wireline Security.  The Wireless M2M Data Communications segment is made up of all our cellular and satellite machine-to-machine communications hardware and services.  The Digital Multimedia, Networking and Wireline Security segment includes our networking hardware and services, video conferencing hardware, and our wire-line security detection hardware.
 
            The Company’s chief operating decision maker is the Chief Executive Officer (CEO). While the CEO is apprised of a variety of financial metrics and information, the Company’s business is principally managed on a segment basis, with the CEO evaluating performance based upon segment operating profit or loss that includes an allocation of common expenses, but excludes certain unallocated expenses. The CEO does not view segment results below operating profit (loss) before unallocated costs, and therefore unallocated expenses, interest income and other, net, and the provision for income taxes are not broken out by segment. Items below segment operating profit/(loss) are reviewed on a consolidated basis.

Summarized below are the Company’s unaudited revenues and operating earnings (loss) by reportable segment:

   
Three Months Ended
   
March 31,
(In thousands)
    
2009
2008
Net sales:
        
  Wireless M2M Data Communications
   $
11,806
 $    19,554
  Digital Multimedia, Networking and Wireline Security
    
         856
            902
    $
12,662
 $    20,456
Gross profit:
        
  Wireless M2M Data Communications
   $
4,781
 $    5,872
  Digital Multimedia, Networking and Wireline Security
    
         519
         516
    $
5,300
 $    6,388
Operating earnings (loss):
        
  Wireless M2M Data Communications
   $
1,000
 $         54
  Digital Multimedia, Networking and Wireline Security
    
            289
            91
  Unallocated Corporate
    
           (2,628)
           (124)
    $
(1,339)
 $         21
Depreciation and amortization:
        
  Wireless M2M Data Communications
   $
635
 $      611
  Digital Multimedia, Networking and Wireline Security
    
            3
            20
  Unallocated Corporate
    
            154
            120
    $
792
 $      751


Certain corporate expenses are allocated to the segments based on segment revenues.

Summarized below are the Company’s unaudited identifiable assets at March 31, 2009 and audited identifiable assets at December 31, 2008:


(In thousands)
  
March 31,
    
December 31
  
Identifiable assets:
  
2009
    
2008
  
  Wireless M2M Data Communications
   $ 46,468     $ 49,598  
  Digital Multimedia, Networking and Wireline Security
     2,284       2,168  
  Unallocated Corporate
     11,140       10,740  
    $ 59,892     $ 62,506  


 
15
 


Item 2.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking Statements

This document contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, forward-looking statements with respect to the Company’s future financial or business performance, conditions or strategies and other financial and business matters, including expectations regarding growth trends and activities in the wireless data business. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "assume," "strategy," "plan," "outlook," "outcome," "continue," "remain," "trend," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. These forward-looking statements speak only as of the date of this Annual Report, and the Company assumes no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements and future results could differ materially from historical performance.

The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: our inability to reposition our platform to capture greater recurring service revenue;, difficulties associated with integrating Orbit One’s business; the risks that a substantial portion of Orbit One's revenues are derived from government contracts that may be terminated by the government at any time; variations in quarterly operating results; delays in the development, introduction, integration and marketing of new wireless services; customer acceptance of services; economic conditions; changes in financial and capital markets; the inability to attain revenue and earnings growth in our wireless data business; changes in interest rates; inflation; the introduction, withdrawal, success and timing of business initiatives and strategies; competitive conditions; the inability to realize revenue enhancements; and extent and timing of technological changes. Actual events, developments and results could differ materially from those anticipated or projected in the forward-looking statements as a result of certain uncertainties set forth below and elsewhere in this document. Subsequent written or oral statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this report and those in the Company’s reports previously and subsequently filed with the Securities and Exchange Commission.

Overview

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company.  This MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the accompanying notes to the financial statements in this Quarterly Report on Form 10-Q for the period ended March 31, 2009.

Net sales decreased 38.1% to $12.7 million for the three-month period ended March 31, 2009, as compared to $20.5 million for the three-month period ended March 31, 2008, primarily as a result of decreased hardware sales.  Service sales for the comparative quarters remained steady.

Although we are experiencing lower than anticipated demand in some of our business units due to general economic uncertainty including poor conditions in the housing and auto market, we believe that our pipeline of future sales opportunities remains solid.  We are increasingly proposing complete M2M solutions to our customers that incorporate Numerex DNATM – Device, Network & Application.  We have tightened our credit policies in response to the economic climate, in particular to our hardware-only sales, which may impact revenues for the balance of the year.

We recognized an operating loss of $1.4 million for the three-month period ended March 31, 2009, as compared to operating earnings of $21,000 for the three-month period ended March 31, 2008.

We recognized a net loss of $1.7 million for the three-month period ended March 31, 2009, or ($0.12) per basic and diluted share, as compared to a net loss of $218,000, or ($0.02) per basic and diluted share for the three-month period ended March 31, 2008.

 
16
 




Critical Accounting Policies and Estimates

The MD&A is based upon our condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America.  The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets, and liabilities during the periods reported.  Estimates are used when accounting for certain items such as deferred revenue, allowance for doubtful accounts, depreciation or amortization periods, income taxes and valuation of intangible assets.  We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances.  There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

For additional information regarding our critical accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2008 and the condensed consolidated financial statements contained therein.


Results of Operations

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008:

Net Sales

Net sales for our reportable segments for the three-month period ended March 31, 2009 and 2008 are summarized in the following table:

   
Three Months Ended
              
   
March 31,
              
(In thousands)
  
2009
    
2008
    
change
    
% change
  
Net Sales:
                        
Wireless M2M Data Communications
                        
Hardware
   $ 5,572     $ 13,421     $ (7,849 )     -58.5 %
Services
     6,235       6,132       103       1.7 %
Sub-Total
     11,807       19,553       (7,746 )     -39.6 %
Digital Multimedia, Networking and Wireline Security
                                
Hardware
     103       202       (99 )     -49.0 %
Services
     752       700       52       7.4 %
Sub-Total
     855       902       (47 )     -5.2 %
Total net sales
   $ 12,662     $ 20,455     $ (7,793 )     -38.1 %
 

Net sales from Wireless M2M Data Communications segment decreased 39.6% to $11.8 million for the three-month period ended March 31, 2009, as compared to $19.5 million for the three-month period ended March 31, 2008.  The decrease in Wireless M2M Data Communications total net sales is primarily the result of decreased hardware net sales, as discussed below.

 
17
 


Hardware net sales from Wireless M2M Data Communications decreased 58.5% to $5.6 million for the three-month period ended March 31, 2009, as compared to $13.4 million for the three-month period ended March 31, 2008.  The decrease in Wireless M2M Data Communications hardware sales is due to the fact that in the three-month period ended March 31, 2008 there was increased demand for devices used for wireless communications between alarm installations and central monitoring stations.  This was related to the Federal Communications Commission (FCC) ruling which allowed carriers to cease providing Advanced Mobile Phone System (AMPS) analog network service and provide only digital service as of February 18, 2008.  There was also a decrease in demand for our wireless modules due to the distressed economy as well as our tighter credit controls.

Service net sales from Wireless M2M Data Communications increased 1.7% to $6.2 million for the three-month period ended March 31, 2009, as compared to $6.1 million for the three-month period ended March 31, 2008.  Connection increases were generated by sales of our security hardware, sales of our wireless modules used in the door entry control solutions used by real estate agents and brokers, as well as by end users and value added resellers who utilize our network to provide customer solutions. Our wireless connections for the three month period ended March 31, 2009 increased to over 771,000, a 32.7% increase in connections over the three month period ended March 31, 2008. While connections have increased at a higher rate than service net sales, the average revenue per unit has decreased to due offering rates that enable us to be more competitive with larger wireless M2M providers.  This resulted in a 69% increase in digital connections and a 60% increase in digital revenue growth.  We continue to focus on increasing connections to our network due to the recurring nature of the service revenues.

Net sales from Digital Multimedia, Networking and Wireline Security decreased 5.2% to $855,000 for the three-month period ended March 31, 2009, as compared to $902,000 for the three-month period ended March 31, 2008.

Hardware sales from Digital Multimedia, Networking and Wireline Security decreased 49.0% to $103,000 for the three-month period ended March 31, 2009, as compared to $202,000 for the three-month period ended March 31, 2008.    The decrease in Digital Multimedia, Networking and Wireline Security hardware sales is primarily the result of a decrease in sales of our interactive videoconferencing hardware.

Service net sales from Digital Multimedia, Networking and Wireline Security service revenues increased 7.4% to $752,000 for the three months ended March 31, 2009, as compared to $700,000 for the three-month period ended March 31, 2008.  The increase in Digital Multimedia, Networking and Wireline Security service is due to an increase in installation and implementation provided to Wireline and Wireless telecommunication customers.

Cost of Sales

Cost of sales for our reportable segments for the three-month period ended March 31, 2009 and 2008 are summarized in the following table:


   
Three Months Ended
              
   
March 31,
              
(In thousands)
  
2009
    
2008
    
change
    
% change
  
Cost of Sales:
                        
Wireless M2M Data Communications
                        
Cost of hardware sales
   $ 4,851     $ 12,051     $ (7,200 )     -59.7 %
Cost of service sales
     2,174       1,630       544       33.4 %
Sub-Total
     7,025       13,681       (6,656 )     -48.7 %
Digital Multimedia, Networking and Wireline Security
                                
Cost of hardware sales
     77       111       (34 )     -30.6 %
Cost of service sales
     260       276       (16 )     -5.8 %
Sub-Total
     337       387       (50 )     -12.9 %
Total cost of sales
   $ 7,362     $ 14,068     $ (6,706 )     -47.7 %

Cost of hardware sales from Wireless M2M Data Communications segment decreased 59.7% to $4.9 million for the three-month period ended March 31, 2009, as compared to $12.0 million for the three-month period ended March 31, 2008.  The decrease in cost of hardware sales from Wireless M2M Data Communications segment is primarily the result of decreased hardware sales.

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Cost of service sales from Wireless M2M Data Communications segment increased 33.4% to $2.2 million for the three-month period ended March 31, 2009, as compared to $1.6 million for the three-month period ended March 31, 2008.  The increase in cost of service sales from Wireless M2M Data Communications segment is primarily the result of an increase in the number of connections to our wireless M2M network during the three-month period ending March 31, 2009.  Connection increases were generated by sales of our security hardware as well as by end users and value added resellers who utilize our network to provide customer solutions.  We continue to focus on increasing connections to our network due to the recurring nature of the service net sales.

Cost of hardware sales from Digital Multimedia, Networking and Wireline Security segment decreased 30.6% to $77,000 for the three-month period ended March 31, 2009, as compared to $111,000 for the three-month period ended March 31, 2008.  The decrease in cost of hardware sales is in direct correlation to the decrease in hardware sales.

Cost of service sales for our Digital Multimedia, Networking and Wireline Security segment decreased 5.8% to $260,000 for the three-month period ended March 31, 2009, as compared to $276,000 for the three-month period ended March 31, 2008.  The decrease in cost of service is attributed to a number of factors including lower costs at our Australian subsidiary.

Gross Profit


   
Three Months Ended
  
   
March 31,
  
(In thousands)
  
2009
    
2008
  
Total net sales
   $ 12,662     $ 20,455  
Total cost of sales
     7,362       14,068  
Gross Profit:
   $ 5,300     $ 6,387  
Gross Profit %:
     41.9 %     31.2 %

Gross profit, as a percentage of net sales, was 41.9% for the three-month period ended March 31, 2009, as compared to 31.2% for the three-month period ended March 31, 2008.  The increase in gross profit, as a percentage of net sales, is primarily the result of two factors. The first is a change in the overall revenue mix. In the three-month period ended March 31, 2009, service revenues were 55.2% of total revenues, as compared to 34.0% in the three-month period ended March 31, 2008. This drives an overall margin improvement since service revenues have a significantly higher gross margin than those achieved through the sale of hardware. Secondly, hardware margins improved slightly in the three-month period ended March 31, 2009.

Operating, Interest and Other Expenses

Operating, interest and other expenses for the Company for the three-month period ended March 31, 2009 and 2008 are summarized in the following table:


 
   
Three Months Ended
        
   
March 31,
        
   
2009
    
2008
    
% change
  
Selling, general, and administrative expenses
     5,184       4,948       4.8 %
Research and development expenses
     508       530       -4.2 %
Bad debt expense
     155       138       12.3 %
Depreciation and amortization
     792       750       5.6 %
Operating earnings (loss)
   $ (1,339 )   $ 21    
nm
  
   Interest income (expense)
     (347 )     (403 )     -13.9 %
   Other income (expense)
     -       (2 )     -100.0 %
Earnings (loss) before income taxes
     (1,686 )     (384 )     339.1 %
   Income taxes
     (37 )     166    
nm
  
Net earnings (loss)
   $ (1,723 )   $ (218 )     690.4 %

 
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    Selling, general, administrative and other expenses increased 4.8% to $5.2 million for the three-month period ended March 31, 2009, as compared to $4.9 million for the three-month period ended March 31, 2008.  The increase is primarily the result of increased professional fees associated with litigation expenses related to our satellite M2M unit.

    Research and development expenses decreased 4.2% to $508,000 for the three-month period ended March 31, 2009, as compared to $530,000 for the three-month period ended March 31, 2008 primarily due to increased capitalized development, as the company increased development on customer facing applications in first quarter of 2009 versus the same quarter in 2008.
 
    Bad debt expense increased 12.3% to $155,000 for the three-month period ended March 31, 2009, as compared to $138,000 for the three-month period ended March 31, 2008.
 
    Depreciation and amortization expense increased 5.5% to $792,000 for the three-month period ended March 31, 2009, as compared to $751,000 for the three-month period ended March 31, 2008.
 
    Interest expense, net decreased 13.9% to $347,000 for the three-month period ended March 31, 2009, as compared to $403,000 for the three-month period ended March 31, 2008.  The reduced expense is the result of a lower amount of outstanding principle on the company’s debt.

     We recorded  tax expense of $37,000for the three-month period ended March 31, 2009, as compared to an income tax benefit of $166,000 for the three-month period ended March 31, 2008.

Liquidity and Capital Resources
 
    We had working capital of $12.0 million as of March 31, 2009, as compared to a working capital of $14.1 million at December 31, 2008.  We had cash balances of $9.5 million and $8.9 million as of March 31, 2009 and December 31, 2008, respectively.
 
    You are referred to Item 1A Risk Factors included in Form 10-K for the fiscal year ended December 31, 2008.  The specified risk factor referenced is headed..."A prolonged overall economic downturn, of one or more market-specific downturns, could have a material adverse effect on our financial condition and operating results." 
      
    The following table shows information about our cash flows and liquidity positions during the three months ended March 31, 2009 and 2008. You should read this table and the discussion that follows in conjunction with our consolidated statements of cash flows contained in “Item 1. Financial Statements” in Part I of this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
 

   
Three Months Ended
   
March 31,
   
2009
    
2008
Net cash provided by operating activities
   $ 2,169     $ 2,289  
Net cash used in investing activities
     (895 )     (2,252 )
Net cash used in financing activities
     (726 )     (684 )
Effect of exchange rate differences on cash
     (2 )     10  
Net change in cash and cash equivalents
   $ 546     $ (637 )
 

We provided cash from operating activities totaling $2.2 million for the three-month period ended March 31, 2009, as compared to $2.3 million for the three-month period ended March 31, 2008.  The decrease in cash provided by operating activities for the three months ended March 31, 2009 versus the comparable period of 2008 was primarily due to the increase in net loss of $1.5 million and the increase in deferred revenue, partially offset by a decrease in accounts receivable and inventory.

We used cash in investing activities totaling $895,000 for the three-month period ended March 31, 2009, as compared to $2.3 million for the three-month period ended March 31, 2008.   The decrease in cash used in investing activities was primarily due to cash used in the prior year three-month period for the purchase of the assets of Orbit One Communications, Inc.

We used cash in financing activities totaling $726,000 for the three-month period ended March 31, 2009, as compared to $684,000 for the three-month period ended March 31, 2008.

           Our business has traditionally not been capital intensive; accordingly, capital expenditures have not been material.  To date, we have funded all capital expenditures from working capital, capital leases and other long-term obligations.

As of March 31, 2009, the Company had $9.6 million in notes payable.  We expect to make principal payments of $2.8 million during the remainder of 2009.  There are no covenants associated with this debt.

We believe that our existing cash and cash equivalents together with expected cash generated from operations will be sufficient to meet our operating requirements through at least the next twelve months.  This belief could be affected by future results that differ from expectations, a material adverse change in our operating business or a default under the Notes as described in Note D of this Quarterly Report on Form 10-Q.

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Off-Balance Sheet Arrangements

As of March 31, 2009, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Item 3.                        Quantitative and Qualitative Disclosures about Market Risks.

The market risk in our financial instruments represents the potential loss arising from adverse changes in financial rates. We are exposed to market risk in the area of interest rates. These exposures are directly related to our normal funding and investing activities.
 
As a result of our placement of $ 5.0 million and $10.0 million of notes due in 2010, at interest rates of 9.75% and 9.5%, respectively, substantially all of our debt as of March 31, 2009 is at fixed rates. The fair market value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. Fair market values are determined based on estimates made by investment bankers. For fixed rate debt, interest rate changes do not impact book value, operations, or cash flows.

Item 4.                        Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2009.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of March 31, 2009, our chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective.
 
Changes in Internal Control Over Financial Reporting
 
During the period ended March 31, 2009, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

PART II.  OTHER INFORMATION

Item 1.
Legal Proceedings.

On January 7, 2008 Orbit One Communications, Inc. (“Orbit One”) and David Ronsen (“Ronsen”) filed an action against Numerex in New York State Supreme Court, County of New York, alleging, inter alia, breach of contract in frustrating Orbit One’s ability to achieve earn out targets in the acquisition and employment agreements. Plaintiffs are claiming $20 million in damages.  On January 25, 2008 Numerex removed the action to the United States District Court, Southern District of New York.  On March 11, 2008 Numerex answered and counterclaimed asserting, inter alia, breach of fiduciary duty and declaratory relief.  On September 23, 2008, Orbit One, Ronsen and related entities commenced an action in the District of Montana seeking to declare Ronsen’s non-compete obligations void.   On December 9, 2008, the court transferred the case to the United States District Court for the Southern District of New York.  On January 7, 2009, the court held a hearing on plaintiffs’ motion for a preliminary injunction.  On January 21, 2009, the Court denied plaintiffs’ motion for a preliminary injunction.  On January 30, 2009, Numerex filed counterclaims against plaintiffs for fraud, theft of trade secrets and confidential information and breach of the Asset Purchase Agreement; and against Ronsen, Naden and Rosenzweig for breach of their fiduciary duties and duty of loyalty to Numerex, as well as breach of their respective Severance Agreements.  On February 24, 2009, the court consolidated the actions and ordered the parties to complete their discovery by February 27, 2009.  On April 17, 2009, the parties filed cross-motions for summary judgment.  Numerex believes that the plaintiffs' claims in each of the related actions are without merit and intends to defend against the allegations and to vigorously pursue its counterclaims. 

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Item 1A.   Risk Factors.

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussion set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as previously filed with the SEC, and the information under “Forward-Looking Statements” included in this report.  At March 31, 2009, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

None - not applicable.

Item 3.
Defaults Upon Senior Securities.

None - not applicable.

Item 4.                      Submission of Matters to a Vote of Security Holders.

None – not applicable.

Item 5.                      Other Information.                                           

None - not applicable.

Item 6.                      Exhibits

 
Exhibit 31.1
Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14.

 
Exhibit 31.2
Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14.


 
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Through its website at www.nmrx.com, the Company makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission.

 
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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
NUMEREX CORP.
 
(Registrant)
   
 
May 11, 2009
 
/s/ ­­­­Stratton J. Nicolaides
 
Stratton J. Nicolaides
 
Chief Executive Officer and Chairman
   
   
 
May 11, 2009
 
/s/ ­­­­Alan B. Catherall
 
Alan B. Catherall
 
Chief Financial Officer
 
Executive Vice President and
 
Principle Financial and Accounting Officer


 
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Exhibit Index

 
Exhibit 31.1
Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14.

 
Exhibit 31.2
Certification of Chief Financial Officer, Executive Vice President, and Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14.


 
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
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